11/25/2009 @ 1:40PM

Barbarians Back At The Gate

Just when it looked as though the private equity titans had buried themselves deep beneath a pile of unbearable debts, bankrupt companies and awful returns, they appear to be digging their way out.

Recent weeks have brought a resurgence in dealmaking, with bankers confident that credit markets will allow
Blackstone Group
, Kohlberg Kravis Roberts and other such firms to buy companies with borrowed money again. Witness the recently announced acquisitions of
IMS Health
for $5.2 billion, Northrop Grumman’s TASC for $1.7 billion and Busch Entertainment for $2.3 billion. Halfway through November, private-equity buyouts topped $22 billon, higher than every quarter since September 2008, according to data provider Dealogic.

“There are some high-profile announcements,” said Harris Smith, a managing partner at Grant Thornton who advises private equity firms. He compared it to driving a car at 100 miles per hour, coming to a screeching stop and then, after a long wait, driving at 25 miles per hour. It’s hardly the same, but at least you’re moving.

For investors in the funds, it’s perhaps more important that stock markets are welcoming private-equity-backed companies returning to the market. When KKR, for instance, cant sell a company–an “exit” in private equity speak–their investors can’t get paid. KKR recently took
Dollar General
public, a sure boost to the performance of a fund.

The pension funds and endowments that invest in private equity could sure use it. They’ve been widely pilloried for handing greater portions of their assets to buyout funds during the boom years. Harvard, Yale and other universities have had to cut their budgets as a result of losses in private equity and other “alternative investments.”

Any buyout revival will ride on the coattails of surging credit markets. The leveraged buyout, private equity’s stock-in-trade, relies on fixed-income investors buying the debt generated from the deal. In a leveraged buyout, private equity firms put up a portion of the purchase price, borrow the rest and put the debt on their target company’s balance sheet.

When banks arrange the loans and bonds to support KKR and General Atlantic’s takeover of
Northrop Grumman’s
government-consulting group, TASC, investors won’t buy debt from KKR or General Atlantic. They’ll buy debt from TASC.

So far, the revival seems limited to the largest firms, those with multibillion-dollar funds, name recognition and the support of the biggest banks. It’s another odd consequence of the federal government keeping the financial system intact. Low rates encourage borrowing and risk taking, just as they did in the credit bubble, and the financial giants have a knack for reaping the benefits. Little surprise which bank is the top advisor for buyout deals:
Goldman Sachs
.